We’re living in a highly digital, forward thinking age.

With so many changes to the payment landscape over the last five years, this episode on the Payments Podcast is taking a specific look at the customer and market demands in regard to the new future payments business model. Questioning, how will the market meet these demands and how should we expect technology to respond?

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Rich: We're living in a highly digital, forward thinking age. As customers, our expectations are changing within the payments landscape, and this has created a new push for innovation within the payment industry. Technology is now responding to these needs.

Hello, I'm Rich Williams, host of the Payments Podcast. Today I'm joined by Patrick Nugent, who is the Financial Industry Advisor at Bottomline Technologies. We'll be discussing the market and customer demands with regard to the new future payments business model, as well as how the market is meeting these demands and how technology has responded to it.

Hello Patrick.

Patrick: Hi Rich.

Rich: Thanks for joining us today. What we're going to discuss is of course a highly relevant topic, particularly now we're already a sixth of the way through 2020. I think a good place to begin would be by looking at how market demands are changing in this area.

Patrick: I would start by saying there's really three different categories of expectations that we are dealing with. One is around speed, the second is around intelligence, and the third is really about digital integration. 

So if we start with speed. First of all, payments must become faster and become cheaper. This is something that we clearly are observing in domestic payments market where the expectation is to have real time settlement 24/7, and with no fees for the consumer.

To be honest, internationally, the trend is the same. For international payments, that's what the expectation is, even though it is still more difficult to achieve, and there's a number of reasons for that. Banks today are not really 24/7 in their infrastructure capabilities yet. And one big obstacle is compliance screening, which is still having a lot of false positives, which doesn't help if you want to have speed and real time processing.

All of that can be addressed as we will see further.

The second expectation is around business intelligence becoming more and more important, and if we phrase it in the context of what we're discussing today, it is about making payments smarter and looking at the context of the payments. What customers and users want is to obtain goods or services, not make payments as such.

So any intelligence on what the payment is for will create further efficiencies, value added opportunities, and will help address the problems that today, payments are still a source of friction in many transactions.

I think if I take a good example, if you take an Uber car, when you get out of the car the payment is taken care of. That's what the kind of expectation is that people have today.

And then to close on the three areas, the third one is integration in digital ecosystems. We see a lot of platform economics, we see network economics taking place. So this is hugely important. Over the next five years it will become even more important moving forward.

This has a number of consequences that are quite interesting. Obviously, business innovation in the payments industry is very attractive for players. Not only for the incumbents, but there are a lot of new entrants there. Of course a lot of intakes. But equally important and not to be ignored, the big takes are there as well. They will come, they will disrupt, they will invade, and they will compete with the traditional players.

What we're seeing is a move towards a model that is more cooperative in the financial industry where diverse business partners interact in these ecosystems in a very efficient way, and in real time. As a consequence for the traditional banks and solution providers like Bottomline, they must adapt to play and remain competitive in the payments industry space. So they need to focus on simple integration, real time services and the fast deployment so they can adapt quickly to changes.

It may be worth mentioning as a final point on this topic, to say that we see that as a result of all these things happening, the distinction between domestic and international payments is actually fading quite fast in the digital world.

Rich: Interesting. You mentioned earlier on there that the goal of the customer isn't really to make the payment, it's to obtain the service. And the payment is a pre-requisite for if that had been provided with that. You also mention integration into digital ecosystems.

What are the implications of this, for example, with customer data?

Patrick: Data is king, clearly. If we see what's happening in the payments industry, there is so much pressure for all parties involved to have more data, to have better data. So richer, more granular, more structured data with the payments is what this is all about.

For regulators it's important because they want to fight crime and fraud. For payment users, it creates operational efficiencies and cost reduction. If you have a payment that is linked to an invoice, you can reconcile that in a more automated way and have cost efficiencies.

For payment processes, the same applies. You can improve automation. Again, very important in the context of compliance screening. And equally important, you can extract business intelligence, seek more data on the context of the payment, on the customer, and therefore offer him better and more relevant services.

So we could say that payments and transactions are becoming smarter. Data rich payments provide more transparency, provide more predictability. And that obviously helps in terms of dealing with fees and charges and having the transparency of the parties that are involved there.

The end to end perspective of a payment in that context is important, because rather than treating a payments message, people want to look at the payment transaction end to end and see what it is for in the context of the value chain. We see that this end to end perspective, and approach is being evidenced by a number of initiatives. Probably the one worth mentioning in this context, SWIFT's gpi initiative is really about end to end transaction transparency by offering service level agreements and tracking capabilities that facilitate these processes.

Of course, as we already said, smarter payments allow for better customer data, intelligence, which of course then helps in creating new value added services. And where the focus is on the service, that adds value to the transaction and not just processing the payment.

Rich: Yes, that's a good lead in actually, Patrick. So the market demands and expectations for the payment industry and quite extensive, and that immediacy for that access to that rich data and the immediacy of fulfilment of payment is becoming more and more prevalent. Which is understandable really, considering the sheer number of potential opportunities that have been generated by these new initiatives.

How exactly is the financial industry addressing the demands of the market, Patrick?

Patrick: Yes. Clearly a lot is happening in this area. But let's maybe focus on three particular areas that really show how the industry is responding to these changing requirements from customers and corporate clients.

And there are really three perspectives that are relevant here, from the regulators' perspectives, the markets themselves, and from the standards domain.

So if we start with the regulators. Basically, the response from the regulators has been open banking, which is being imposed on banks by regulators with the purpose of increasing competition and encouraging innovation. So that is clearly a driver for the whole open banking initiative, not only in the UK but also in Europe and other places.

Let's say that this transparency is achieved by enabling seamless access to data through the implementation of APIs, like account to account, or like payment initiation, that give access to third parties of data that is held by banks on their customers and their transaction.

The consequence really is that open banking again opens the door for non-bank entities to enter this financial service space, and offer services on top of what the core capabilities of the banks are, by providing value added services on top of these basic capabilities.

That also means that the banks' current value add and business model is challenged by these new players and they need to respond to them.

If we look at the financial markets, the response there is really this whole push towards instant payments and real time process. We've seen it in the UK. Faster Payments is there since 2008 and were probably amongst the first to go towards an instant payment infrastructure.

In Europe it started with SEPA in 2015, but now we see schemes emerging in many markets in Europe, including the Nordics, EBA, and more recently Eurosystem TIPS, which is providing this real time service.

It's not just Europe. It's all over the world. We see it in Australia, China, India, Singapore, the US. I think today, over 50 countries probably have instant payment infrastructures. And that is really in response to this need for speed, if you want.

An interesting observation there is that these faster payments are not only an attraction to new players to come and play, but they're also a challenge for some players who are there, like the card companies, who have to respond to them. They're under pressure with their business models, and what we see as a consequence is that some of the card companies are taking initiatives to position themselves in this financial industry real time payment world in a different way.

You see, for instance, MasterCard acquiring Transfast. You see Visa acquiring Earthport. Clearly that is to reposition themselves to seize the opportunities and to fight off this Faster Payments competition.

And further repositioning takes place as well really by acquiring incumbent players in the interbank space. A good example there is MasterCard's acquisition of Vocalink. So again, dynamics of how things are moving. 

And then finally, that leads us to the ISO 20022 perspective, the standardiser space. So for all of this to be possible, something is needed that actually structures it, that actually standardises it, and allows for interoperability between the different systems. And for smarter and better payments, ISO 20022 is clearly the messaging standard, the financial messaging standard that is setting the future, and catering for all the needs and requirements that these market infrastructures require.

As we see today, almost all the instant payment schemes use ISO 20022 as their messaging standard. We see it is being adopted by a lot of the high value real time global settlement systems like Fedwire, CHIPS, CHAPS, TARGET2. SWIFT is in the process of moving its whole correspondent banking messaging space from FIN to ISO 20022 as well.

So clearly the push and the general adoption is there, and ISO 20022 is becoming this global standard. And it's not a surprise, because 20022 does is offer end to end common standards for both domestic and international transactions. It allows, as we mentioned before, this need for more data, more granular data, more structured data. That's what ISO 20022 enables.

By doing that, it also creates operational efficiencies that people are looking for in that context.

So ISO 20022 is, if you want, some kind of enabling glue in this whole payments space where we see the evolutions and the interactions between all those domestic and international systems becoming more and more and more important. We're living in a global world, and that's certainly the case for payments.

ISO 20022 is clearly an enabler for that future.

Rich: Okay, so the markets are demanding more data, more richness of data. More speed of settlement, of the banks looking at ways of dealing with FinTechs to take care of some of the more tricky pieces for them. And the regulators are building a standardisation to actually drive this forward.

If we look specifically at the financial messaging space, how exactly have the demands of the industry gone on to trigger the new technologies to make all this possible?

Patrick: The financial messaging model that has enabled the payment space has been around for a very long time. It is something that for many years worked, and there was no need to challenge it and it catered for all the requirements that were there. It evolved and it adapted, and adjusted.

In recent years, again, in response to these different demands, market demands that we've been talking about, things are changing. The traditional messaging does not necessarily cater for the requirements of these new environments and the speed and the interaction and all of that.

What we see is that there is some technology innovation taking place, and entering this traditional messaging space, because this new technology caters for solutions that the traditional messaging cannot necessarily provide. We're talking about Blockchain, we're taking about APIs in the context of open banking, but also outside thereof. And real time processing clearly are innovations that are taking place.

These are then further supported by new capabilities like big data processing, cloud computing, artificial intelligence, machine learning, etc. So it's actually amazing to see how technology is just catching up to the requirements and the demands of the market. And it's interesting to see how that evolution will take place in the coming years.

If we look at each of the three I mentioned in slightly more detail, and let's start with Blockchain. It clearly is innovation that works. It provides new approaches for automation, and we see that there are a number of initiatives taking place in the payment space where people are trying out how they can use Blockchain in this context. Reconciliation is a good example where we see some proof of concepts and some approaches there.

Ripple is a Blockchain based solution for SWIFT settlement system. And even though there are some initiatives in payments, I think today it's probably more security space that will benefit from Blockchain innovation in the shorter term.

What we still see with Blockchain is that it's not an end to end solution. So Blockchain is not just going to come in and replace financial messaging, because it lacks integration capabilities. It has no interoperability, and therefore it cannot provide an end to end solution today in that respect. But clearly it has niche positions within the value chains where it adds value and where it provides innovation and automation that cannot be achieved through messaging.

With APIs, it's a bit the same story, if you want. It's basically new ways of accessing data and new services. One of the great benefits of APIs, of course, is they are real time. So it supports the whole real time processing push that people are expecting.

Again, APIs are not the end to end solution for everything, and again APIs today are not really being leveraged to the extent that they could be because there's still some standardisation that is required to make these API approaches more industry efficient and more global.

In a way, ISO 20022 can help there because it does define common sets of business data that will allow interoperability. But there's still a way to go. Maybe UK open banking is more advanced than other places in the world there. And I would say at this stage, the reason for the success here is because the regulation, the standardisation, and the interoperability that is required are addressed. That gives good results.

Then the third technology innovation is all about these real time processing capabilities that are available, that are fully deployable in financial services. We've seen also that cloud-based computing, that obviously supports real time, is becoming more acceptable and more ingrained in this business.

As a result, what we see emerging for financial transactions is what I would call a new end to end payments transaction business model, that is not only based on financial messaging anymore. It's a hybrid model based on co-existence of different technologies, each with their own specific purpose and use and benefits. And what we see is a mix of mobile, of APIs, of Blockchain, of messaging. And when we talk messaging, in particular ISO 20022 based.

As an example, what you can see is, for instance, mobile e-banking APIs are very interesting for payments initiation. Whilst Blockchain is probably a good technology for clearing settlement. And the ISO 20022 messaging is probably the best solution for catering for the interbank flow.

So we really see the coexistence and this hybrid model evolving as we move forward. And the role of ISO 20022 as an enabler here is quite important, as it allows to adapt and extend the business standards to new technologies. That then leads to interoperability, reduced complexity and risk mitigation, and overall data consistency end to end, which is very important. You can basically make sure that the data that is carried with a message and with a transaction stays there all the time and is not truncated.

Hybrid model, I think a good example, if we look at ASX Australia. So it's Australia's new securities clearing and settlement system. It's an infrastructure that is basically combining a Blockchain node with ISO 20022 messaging to provide a full end to end solution in that context. So that's a good example.

Now, again all of this, like everything else we've been talking about, has implications on how solution providers like Bottomline and others need to respond to this to make sure that their value propositions are adapted, and are future oriented in terms of dealing with those technology and solution requirements.

To summarise what needs to happen, people need to look at their infrastructure and have a strategy that ensures it deploys API based architecture in the cloud, with speed, and caters for the use of micro services to be nimble and flexible and integrated through the APIs.

I think key also is to make sure that, and we've mentioned how important data and rich data is. So people need to make sure that when they look at their integration and data extraction and processing processes, that they synchronise among clouds, API, EDI, point to point, etc. That's key.

I think today, instant payments must be part of any core offering and it's probably for any future offering where it should start. And then if we look at the other end, the legacy systems, there's a lot of legacy infrastructure and platforms out there. And they're just going to not necessarily be all replaced with new facilities and new processing. But they need to be enabled with API and instant payment capabilities.

So there's a lot of work to be done for some people.

Rich: It certainly sounds like it. We know what the markets are demanding. We know where everyone's hopefully trying to strive towards; more standardisation and more innovation. Practically speaking though, Patrick, how will these opportunities and benefits actually be brought to and made available to businesses to actually take advantage of?

Patrick: As I just explained, I think that financial institutions and their solution providers need to evolve their architecture. And there are a number of reasons we've specifically talked about in that context, but that's not sufficient.

I think if they want to leverage the capabilities and the opportunities and the benefits they can offer to their customers, they're going to have to rethink their business delivery models as well. And respond in a way that is adapted to how people want to consume services and processes in that context.

What we see is, basically if we assume that real time payments are going to be a key driver in this context, the real time payments business model that we see appear is one of rails and overlay. That's what it's referred to. It's about providing basic functionality at a very low cost on a public goods basis. Those are the rails.

And then additional functionality is delivered as overlay services, the value add when people are willing to pay for those services and the support.

The infrastructure needs to consider moving to open platforms which can easily leverage clouds, APIs, and are going to be more and more data driven, which then logically leads to digital marketplaces and platforms, economics in that context, which are driven by open banking initiatives. But what we see is these other initiatives as well.

There are a number of collaborative partnerships taking place where a number of banks and solution providers share data in a digital ecosystem and create new dynamics by doing that. I think that's a key direction.

And given the cloud is becoming so efficient, banking as a service is really there. And it's interesting because it gives FinTechs and non-banks access to bank infrastructure and offers services on top of that.

So there's a lot of movement and initiative in that respect.

Finally, as I mentioned before, those big takes. As I said, they want to play, they want to be disruptive innovators, or innovative disruptors. Basically, again, with Visa Direct and MasterCard, two good examples of new initiatives of some players in the real time payment space.

So for me, to close, I think what's happening in the financial industry, in the payments industry, is extremely exciting. And I think there's a lot of fantastic opportunities for people to provide solutions and be a player in these ecosystems. Focusing on innovation. Probably also focusing more and more on this collaborative and the partner aspect.

And we see more and more evidence that the biggest innovation opportunities are for those who are actually capable of building solutions by combining the different forces that we've just been talking about.

So it's an exciting future, and I look forward to seeing how it evolves.

Thank you.

Rich: No, thank you. There are clearly a lot of moving parts there between the regulators, the banks, the non-banking technology providers. And you mentioned strategic partnerships or collaboration there. So for anyone interested to learn more about that, we did cover that topic in some depth a couple of episodes ago on this same podcast.

Patrick, thank you very much for joining us today. It was a real pleasure.

Patrick: Thank you. It was my pleasure.

Rich: So unfortunately that's all we have time for today. We'll be back with some more podcasts very soon. In the meantime you can listen to more episodes on all things payments at the touch of a button using your preferred provider. We'll see you all next time.

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